Metal stocks results preview for Q3FY12: Motilal Oswal

Metal prices have corrected significantly in 3QFY12, amidst European sovereign debt crisis and China's efforts to curb inflation and maintain steady economic growth. European steel prices are down 6% QoQ at their 16-month low levels while Chinese steel prices are down 13% QoQ. More importantly, demand from China, which is the largest consumer of both ferrous and non-ferrous metals, is slowing down. China's crude steel production dropped for sixth consecutive month by 17% to 49.9mt in November (down 9% MoM, down 0.6% YoY) to the lowest level since September 2010. Daily output of the world's top steel producer totaled 1.663mt during November, as mills scaled back production with weakening demand in the traditional low season.

Similarly, non-ferrous metal demand in China is expected to experience slower growth in 2012. According to Wang Huajun, deputy secretary-general of China Non-ferrous Metals Industry Association, demand for non-ferrous metals may be up 5-8%.

Resource prices are also declining, albeit at a slower pace. Iron ore prices (CFR China; 63 Fe) are down to USD142/ton in Dec-2011, down 29% from its yearly high of USD198/ton on fears of lower demand from China. Coking coal prices are coming down at slower pace due to structural supply issues.

Indian steel demand slows though JPC data shows otherwise: According to JPC data, steel consumption during Apr-Nov 2011 rose 3.9% YoY to 45.1m tons. For November 2011, real consumption grew 12% YoY (-6.2% MoM) to 5.5m tons. This is contrary to our signals on channel checks. As per our interaction in industry, demand is slowing down and sentiments are deteriorating. Small and medium enterprises continue to destock as demand for end products remains weak. JPC derives real consumption from domestic production and external trade. It does not take into account inventory adjustments with traders due to data collection difficulties. Hence, JPC's monthly real consumption data is erroneous.

Rupee depreciation continues to support Indian metal prices: Average LME prices for aluminum, copper and zinc are down 12%, 16% and 14% QoQ, respectively, while average domestic prices have corrected only 3%, 8% and 5% QoQ, respectively. Similarly, average steel prices are down QoQ in China (13%), Europe (6%), Russia (7%) and North America (5%). However, Indian steel prices continue to find support due to depreciating rupee despite weak demand. Rupee has depreciated ~9% against USD to 50.5 in this quarter. As per SteelPrices-India, average long product prices are up 5% QoQ and flat product prices are down 2% QoQ in India.

Steel pricing environment remains negative due to subdued demand: Outlook for Indian steel prices remains negative due to weakening demand and global economic slowdown. Once rupee reverses downtrend, there will be more pressure on prices on the back of cheaper imports. Prices of raw materials (such as iron ore and coking coal) are also in correction phase globally over past few months, although at a slower pace. They will definitely push prices further downward if demand does not improve.

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